* Lonza unlikely to succeed unless Patheon offer sweetened
* Analysts think bid price of $3.55 is already full
* Due diligence ends on Oct. 15
* Options include eyeing parts of Patheon, formulation JVs
By Andrew Thompson
ZURICH, Oct 12 (Reuters) - Swiss drug industry supplier Lonza is likely to fail with its $460 million bid for Canada's Patheon and could be forced to look instead at buying parts of the company or shifting its gaze elsewhere.
Analysts say only a substantially sweetened offer could tempt U.S. investment company JLL, which currently controls 57 percent of Patheon's share capital, to accept the offer, even though Lonza has the backing of Patheon's management.
But they warn a higher price than the $3.55 currently on the table would be hard to justify given the substantial integration costs and Patheon's ongoing restructuring.
"Lonza's bid for Patheon so far was received negatively by the market, accounting for Lonza's recent underperformance," bank Sarasin chemicals analyst David Kaegi said.
Lonza shares lost about 6 percent when the company announced its offer for Patheon on Aug. 21 and are now trading at around 110 Swiss francs, roughly the same as prior to the announcement. They had risen 10 percent for the year before the takeover offer was made.
Similarly, Patheon investors appear doubtful the deal will go through with shares of the Toronto-listed company, which specialises in drug formulation, languishing around 20 percent below Lonza's bid price at C$3.00 ($2.86).
"It is fair to say that the market doesn't believe in the offer. Nor do I think that JLL will accept," said Carla Baenziger, chemicals analyst at Vontobel.
Although JLL has given up its hostile bid for the 43 percent in Patheon it does not own yet, the New York-based company has reiterated its unwillingness to enter negotiations with Lonza, having said earlier it is not interested in selling.
On the other hand, there are currently no signs that Lonza is willing to raise its bid, which Baenzinger views as positive.
PLENTY OF ALTERNATIVES
Given the potential integration costs and Patheon's continuing restructuring, the price already looks high.
"With an offer price of $3.55 per Patheon share, I see an added value for Lonza shares of only around 6 percent", Flueckiger said. "For Lonza, Patheon would be nice to have but it is in no way essential."
"It's not always a question of black or white. Instead of an outright takeover, it's far more likely the two parties will meet in the middle," said Kepler analyst Florian Gaiser.
Lonza may acquire parts of Patheon or both sides could enter a cooperation which would not need the approval of JLL, he said.
Lonza Chief Executive Stefan Borgas said in June the group's finances had improved significantly with the conversion of a 430 million Swiss franc ($417.5 million) bond into equity and the issue of a new 300 million franc bond.
So even if Lonza decides to pull the plug on the deal, there are other options for it to break into the drug manufacturing market, said Vontobel's Baenziger.
Lonza's management has said it is in talks with two or three other players in the market.
"It's anyone's guess who they are talking too. The market is highly fragmented and there are a number of candidates out there," said Kepler's Gaiser.
Lonza might prefer to develop its own drug formulation expertise, but this would take longer than buying it. They could also opt for partnership with a big player in India, he said. Patheon said in September it was discussing a number of "strategic transactions" with Lonza, suggesting it might yet reach a compromise.
A Lonza spokesman said the company has bought itself more time to assess whether Patheon was the right partner and if $3.55 was the right price after extending due diligence to Oct. 15.
Lonza had said earlier that it was not prepared to enter into a bidding war.
Helvea analyst Martin Flueckiger said the chances of Lonza hiking its offer were "marginal" at best, adding he only sees Lonza's chances of succeeding at 30 to 40 percent.
(Editing by Sitaraman Shankar)